Dean Foods and Herbalife Just Raised the Bar

A bullish market signal and positive CAPS sentiment might make a winning combination.

Offering earnings guidance above analyst expectations is obviously a bullish sign, as over time earnings growth follows sales growth. And when a company predicts greater sales or profits, we expect its stock price to soon follow.

Sometimes things don't work out as planned, though, so we'll pair up the brighter outlook with the sentiments of the more-than-180,000-member Motley Fool CAPS community. If the best and brightest stock pickers think a company's long-term potential is outstanding, coupled with the company's own improved sentiment, maybe investors should take notice, too.

Stock

CAPS Rating(out of 5)

Prior or Consensus Estimate

Current Guidance

Period

Dean Foods(NYSE: DF)

***

$1.18

$1.18 - $1.28

FY12 EPS

Herbalife(NYSE: HLF)

**

$3.79

$3.88 - $3.98

FY12 EPS

Don't blindly buy into their heady outlook -- you still need to do some research. Use the announcement as a jumping off point for additional research.

Milking the situationJuly's withering heat -- the hottest July on record -- tore into crops like a plague of locusts. The drought is expected to cause the 2012 corn crop to drop to its lowest yield per acre in 17 years, while soybeans will fall to a 10-year low. This is causing a ripple effect throughout agriculture. Corn, for example, is a mainstay of animal feed, so not only are ground beef prices at record highs, but dairy farmers are reducing herd size because it's too expensive to feed the cows.

The country's largest dairy processor, Dean Foods, saw its share price tumble throughout July as conditions worsened, particularly after the Agriculture Department reduced its production estimates for raw milk while raising its price forecast. Dean's stock lost more than a quarter of its value, falling from $17 a share at the start of the month down to almost $12.

Dean believes the reaction to the drought, at least as it impacts the dairy industry, is an overreaction. Compared to a few years ago when grocery chains like Safeway(NYSE: SWY) and Kroger(NYSE: KR) were cutting prices on private-label milk, today's environment is much more stable and margins have remained elevated as milk generally had a lot more production earlier in the year when there was relatively weak domestic demand creating a favorable pricing situation.

While that made the stock look attractive, what really grabbed investors' attention was the announcement it would spin off its WhiteWave-Alpro division, which produces healthy dairy and dairy-substitute brands such as Horizon Organic and Silk. Dean's stock regained all the ground lost in July and then some.

I've had a long-term outperform rating on Dean Foods on CAPS, which I don't plan on changing, but tell me in the comments section below whether you'd sell the spinoff once it hit your portfolio.

The silence is deafeningMy mother used to tell me, if you can't say something nice, don't say anything at all. But when it comes to investing, sometimes it's what's not said that matters.

Investors in nutritional supplement marketer Herbalife got a taste of that when billionaire hedge fund operator David Einhorn showed up on an earnings conference call earlier this year and peppered management with questions about the visibility the company had into sales made to consumers and its direct-market distributors. Einhorn didn't disparage the company, but just his mere presence caused the stock to tumble as people thought he was about to mount a short attack against Herbalife.

After his sharp insights into Green Mountain Coffee Roasters(Nasdaq: GMCR) last year and Allied Capital before that -- with his most famous critique being of Lehman Brothers before its implosion -- the markets anticipated some devastating revelation. So when Einhorn didn't say anything afterward and didn't show up on Herbalife's second-quarter conference call the other day, the stock rose.

Investing by guessing how others are going to invest isn't investing at all, but is instead gambling. Herbalife management seems to have taken the correct tact here by answering Einhorn's questions when they were asked, buying up shares when they tumbled in the aftermath of his appearance, and then ringing up $1 billion in quarterly sales for the first time ever. They've even gone on to delve more into their business and plan to convey that information to investors in an effort to be more transparent.

CAPS member otoolebrendan87 believes Herbalife is on the right track and has been unfairly punished by speculators. While the stock is up 25% off the lows it hit following the Einhorn effect, they're still 27% below the levels they were trading at before the hedge fund operator showed up at the party.

The stock trades at 12 times earnings estimates and its enterprise value goes off at a not-outrageous 14 times free cash flow. It might no longer be the bargain-basement stock it was a few months ago, but it's still not a highflier here.

Tell me in the comments section below if country singer Alison Krauss got it right when she crooned, "You say it best when you say nothing at all."

Raise your sightsIf you're interested in learning about the prognosis of former Einhorn target Green Mountain Coffee Roasters, check out The Motley Fool's new premium report analyzing the prospects for the company. Get your copy now; it includes a full year of exclusive analyst updates.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.